Peter Thiel, Competition Is for Losers

This is a discussion of Peter Thiel's Wall Street Journal Essay, Competition Is for Losers. It is part of a series of foundational texts on What is a startup business?

You can purchase Peter Thiel's book below:

Peter Thiel

Peter Thiel, cofounded Paypal and invested in Facebook, amongst other things. He is vocal, and always interesting and original, on a range of topics, but here we will discuss his

The essay captures a key idea in the web of ideas that constitute Thiel's view of startups. Thiel explores these ideas at length in 0 to 1, but this essay is actually a chapter from the book that the Wall Street Journal published, and in many ways it gives us a good sense of the larger theory.

 In 1933, Edward Chamberlain (in Theory of Monopolistic Competition) introduced the idea of product differentiation. To grossly simplify the argument, a firm can charge a premium for a product to the extent that the product is differentiated in valuable dimensions from other commodity products. In an extreme case, the firm could have a monopoly on the service or product, and can charge monopolistic prices.

Monopolies, Profit and Competition

Thiel points out how it is possible to produce such a monopoly: by coming up with a novel product or service. And coming up with a novel product or service (from 0 to 1), is not easy because by definition, it has never been done before.

I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.(Peter Thiel)

He contrasts this with taking an idea that already exists and simply doing more of it by moving it to a different location, or making incremental improvements on it in scale (1 to n). The problem with this kind of business is that it is hyper-competitive and profits quickly erode.

Q: What would Thiel make of companys that excel at going from 1 to n? Consider that Rocket Internet has a thriving business openly based on copying other ideas.

Morality

Thiel spends some time defending monopolies. He claims that our traditional loathing for monopolies only applies in a "static" world where they rent collect in exchange for little added value.

But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. (Peter Thiel)

Framing the "relevant market"

One of the interesting points he brings up is that a monopoly is defined against a market. He gives two examples that illuminate in different ways. He points out that monopolistic companies define the market as large as possible so as not to be accused of legal monopolies, and companies with small markets define the market as narrowly as possible to appear more dominant.

Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? (Peter Thiel)

Find a monopoly

Peter Thiel ends with a great summary, so I'll lets say it.

All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition. (Peter Thiel)

Q: I want to interrogate Thiel's central thesis -- that you should come up with a truly original idea, to go from 0 to 1.

He puts forward examples like Google as an example. But Google was not the first search engine, and there were other search engines at the time. Thiel's most famous investment, Facebook, dominates social networks now but it there were dozens of social network at the time, and the market was dominated by MySpace, which itself had overthrown Friendster.

Are these still good examples of going from 0 to 1?

You can purchase Peter Thiel's book below:

Peter Thiel, Competition Is for Losers

This is a discussion of Peter Thiel's Wall Street Journal Essay, Competition Is for Losers. It is part of a series of foundational texts on What is a startup business?

You can purchase Peter Thiel's book below:

Peter Thiel

Peter Thiel, cofounded Paypal and invested in Facebook, amongst other things. He is vocal, and always interesting and original, on a range of topics, but here we will discuss his

The essay captures a key idea in the web of ideas that constitute Thiel's view of startups. Thiel explores these ideas at length in 0 to 1, but this essay is actually a chapter from the book that the Wall Street Journal published, and in many ways it gives us a good sense of the larger theory.

 In 1933, Edward Chamberlain (in Theory of Monopolistic Competition) introduced the idea of product differentiation. To grossly simplify the argument, a firm can charge a premium for a product to the extent that the product is differentiated in valuable dimensions from other commodity products. In an extreme case, the firm could have a monopoly on the service or product, and can charge monopolistic prices.

Monopolies, Profit and Competition

Thiel points out how it is possible to produce such a monopoly: by coming up with a novel product or service. And coming up with a novel product or service (from 0 to 1), is not easy because by definition, it has never been done before.

I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.(Peter Thiel)

He contrasts this with taking an idea that already exists and simply doing more of it by moving it to a different location, or making incremental improvements on it in scale (1 to n). The problem with this kind of business is that it is hyper-competitive and profits quickly erode.

Q: What would Thiel make of companys that excel at going from 1 to n? Consider that Rocket Internet has a thriving business openly based on copying other ideas.

Morality

Thiel spends some time defending monopolies. He claims that our traditional loathing for monopolies only applies in a "static" world where they rent collect in exchange for little added value.

But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better. (Peter Thiel)

Framing the "relevant market"

One of the interesting points he brings up is that a monopoly is defined against a market. He gives two examples that illuminate in different ways. He points out that monopolistic companies define the market as large as possible so as not to be accused of legal monopolies, and companies with small markets define the market as narrowly as possible to appear more dominant.

Suppose you want to start a restaurant in Palo Alto that serves British food. "No one else is doing it," you might reason. "We'll own the entire market." But that is only true if the relevant market is the market for British food specifically. What if the actual market is the Palo Alto restaurant market in general? And what if all the restaurants in nearby towns are part of the relevant market as well? (Peter Thiel)

Find a monopoly

Peter Thiel ends with a great summary, so I'll lets say it.

All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition. (Peter Thiel)

Q: I want to interrogate Thiel's central thesis -- that you should come up with a truly original idea, to go from 0 to 1.

He puts forward examples like Google as an example. But Google was not the first search engine, and there were other search engines at the time. Thiel's most famous investment, Facebook, dominates social networks now but it there were dozens of social network at the time, and the market was dominated by MySpace, which itself had overthrown Friendster.

Are these still good examples of going from 0 to 1?

You can purchase Peter Thiel's book below:

Marc Andreessen, Product/Market Fit

This is a discussion of Marc Andreessen's "The only thing that matters", also sometimes entitled "Product Market Fit." (June, 2007) It is part of a series of discussions of foundational texts on What is a startup business?

Marc Andreessen

Marc Andreessen co-authored Mosaic, the first web browser, founded Netscape, and Andreessen-Horowitz, the venture fund. He is outspoken and active on twitter.

Product/Market Fit

Andreessen opens by declaring that the post is about "the only thing that matters for a new startup." Towards the end of the essay he tells us:

The only thing that matters is getting to product/market fit. (Marc Andreessen, all bold in original)

He begins with some context. He divides the causes of startup success into three components: team, product and market, which he borrows from Andy Rachleff, and goes on to quote Andy:

• When a great team meets a lousy market, market wins
• When a lousy team meets a great market, market wins.
• When a great team meets a great market, something special happens. (Andreessen quoting Andy Rachkeff)

This is a counterintuitive claim. Many people who discuss startups will claim that the founder, or the founding team, is the single most important thing and that "smart" people will figure out how to make something successful.

I just googled what to look for in a startup team and this is the first link that appeared: 5 things angel investors should look for in a startup Note that team shows up twice on this list (#1 all star team and #4 integrity).

Markets trump founders

Andy seems to be saying that the market is more important. Andreessen summarizes the logic in two key statements:

In a great market -- a market with lots of real potential customers -- the market pulls product out of the startup. (Marc Andreessen)

and

Conversely, in a terrible market, you can have the best product in the world and an absolutely killer team, and it doesn't matter -- you're going to fail. (Marc Andreessen)

I think the second statement is non-controversial, and the primary reason that people fail to start a business is that they don't make things people want. The first, though, is interesting. It suggests that if  you pick the right product or service, you might succeed in spite of a mediocre team. (Mediocre teams rejoice).

Contrast: This view contrasts with the view that the right founder will figure it out, but there is a subtle variation. Chris Dixon has proposed that you need the right founder for a particular market, and that not all founders are suited to all markets. I don't think of this as an opposing view, so much as an interesting addition.

Q: Although I think that many people have said picking the right founder is key, I cannot recall a single key text where this is clearly laid out. Can the reader recall such a text?

Advice

The essay culminates in a piece of advice though:

When you are BPMF [before product/market fit] , focus obsessively on getting to product/market fit.

Do whatever is required to get to product/market fit. Including changing out people, rewriting your product, moving into a different market, telling customers no when you don't want to, telling customers yes when you don't want to, raising that fourth round of highly dilutive venture capital -- whatever is required.

When you get right down to it, you can ignore almost everything else. (Marc Andreessen)

The best part of this is the singular goal he proposes.

Q: I wonder to what extent this contradicts the advice of others. I think this is compatible with Graham's advice to focus on growth. It is not compatible or incompatible with Thiel's advice to earn a monopoly by solving a unique problem. There is nothing that indicates the problem or solution has to be unique. That is more of an issue for Thiel who hasn't specified what he means by his uniqueness criterion. There is also nothing here about having a monopoly. 

Paul Graham, Startup = Growth

This is a discussion of Paul Graham's classic essay Startup=Growth (Sep 2012). It is part of a series of discussions of foundational texts on What is a startup business?

Paul Graham

Paul Graham is the founder of Ycombinator, one of the earliest, and certainly most successful, of the accelerators, and the one that all others copy.

Ycombinator also gave us Hacker News, which is the best aggregator of startup links.

Startup=Growth

But let us turn to his seminal essay, Startup=Growth, and spoiler alert, he thinks the distinguishing feature of a startup is high growth.

Graham summarizes his thesis in the opening:

A startup is a company designed to grow fast. Being newly founded does not in itself make a company a startup. Nor is it necessary for a startup to work on technology, or take venture funding, or have some sort of "exit." The only essential thing is growth. Everything else we associate with startups follows from growth. (Paul Graham)

The rest of the essay is broken up into sections, to point out the various features that follow from the central growth thesis. Along the way he points out why certain types of certain features of companies seem to reoccur in startups. For instance, why they tend to be software companies.

Contrast: This seems compatible but not identical with Thiel's view that startups should "earn a monopoly by solving a unique problem", and with Andreessen's view that startups should be discover product market fit. You might claim that growth will follow from the monopoly, or the product market fit, depending on which other theory you believe. Would be interested if readers know of another theory of startups that is incompatible with the growth definition.

Redwoods

The central idea of this section is that it is not enough just to serve customers -- that is what a business is after all -- but it must also scale, and to scale by design from their inception. Many startups or software companies because software scales so easily. The challenge for these companies to find something that delights users.

Ideas

First, Graham points out that because the startups are after such huge markets, and the rewards are so high, the solution space has been well explored, and there is a lot of competition.

However, in some areas, technology moves so fast that it produces new opportunities ("Rapid change in one area uncovers big, soluble problems in other areas"), and new solutions to problems, ("startups create new ways of doing things, and new ways of doing things are, in the broader sense of the word, new technology.")

Contrast It would be instructive to compare this to Peter Thiel's advice on ideas, which is to ask yourself what facts you know to be true, but with which most people disagree. Graham's advice seems to be forward looking having to do with new technologies, and new opportunities. Thiel's advice seems to be more introspective because you aren't told to look for an unpopular truth. Q: Do readers think they disagree with each other, agree with each other, or have different opinions that are fundamentally compatible?

Rate

This section is about the growth rate, which is what the whole essay is really about. Graham makes the point that the growth is S shaped and the middle high growth area is what startups aspire to achieve. The best part though is concrete numbers and what they measure:

A good growth rate during YC is 5-7% a week. If you can hit 10% a week you're doing exceptionally well. If you can only manage 1%, it's a sign you haven't yet figured out what you're doing.

The best thing to measure the growth rate of is revenue. The next best, for startups that aren't charging initially, is active users. That's a reasonable proxy for revenue growth because whenever the startup does start trying to make money, their revenues will probably be a constant multiple of active users. (Paul Graham)

When Graham talks about the finding the growth part of the S curve, he sounds closest to Marc Andreessen talking about product market fit.

Q: I would think that the value of a growth rate would depend on the stage of the company. However, he is correct in that any example where I tried 1% per week, I didn't come up with a viable company when the starting point is, say, 10,000 users.

Compass

Graham asserts that the centrality of growth as the metric for success allows founders to focus, and quickly decide between competing claims on their time and attention. He also finds it to be a good way to come up with new ideas en route to solving problems.

Value

Growth rates compound so our intuitions are usually wrong about how fast things can grow and how large they can become:

weekly	yearly
1%	1.7x
2%	2.8x
5%	12.6x
7%	33.7x
10%	142.0x

Deals

Graham describes the motivations for the various actors in a startup story.

Investors get a good risk to return ratio with the added benefit of closely aligned goals because, he claims, capital gains are harder to game than dividends because it is down the waterfall after expenses, salaries etc are paid out.

Founders get to more control of their startup by accepting venture funding.

Finally, acquirers get access to growth.

Understand

Graham summarizes his own argument so well, I'll just quote him again:

If you want to understand startups, understand growth. Growth drives everything in this world. Growth is why startups usually work on technology—because ideas for fast growing companies are so rare that the best way to find new ones is to discover those recently made viable by change, and technology is the best source of rapid change. Growth is why it's a rational choice economically for so many founders to try starting a startup: growth makes the successful companies so valuable that the expected value is high even though the risk is too. Growth is why VCs want to invest in startups: not just because the returns are high but also because generating returns from capital gains is easier to manage than generating returns from dividends. Growth explains why the most successful startups take VC money even if they don't need to: it lets them choose their growth rate. And growth explains why successful startups almost invariably get acquisition offers. To acquirers a fast-growing company is not merely valuable but dangerous too. (Paul Graham)